Southeast Asia is one of the world’s major economic growth engines. Home to a number of fast-growing emerging markets, the region has made a solid contribution to global growth since the financial crisis in 2008, as developed markets struggled to overcome the effects of too much household and government debt.
But a strengthening recovery in the US economy suggests that the story is changing. The growth rate of developed countries is now accelerating, while emerging Asian economies are generally flat-lining. In Asia, one of the main issues is international trade, as exports have been slowing in many countries across the region since 2014.
“Exports have created a lot of drag on growth,” said Lim Su Sian, ASEAN Economist, Global Research, HSBC Singapore. “Investment and private consumption by households and businesses have not really made up for the drop in trade.”
Ms. Lim was speaking at HSBC’s Asian Outlook & RMB Forum, held in Kuala Lumpur, where she presented the economic outlook for Southeast Asia. The topics under discussion included the US economy, the significance of Chinese trade, and the internal dynamics of Southeast Asia.
There have been signs of export values gradually picking up across Asia since early 2016, and Markit's PMI survey shows that Asian manufacturers have seen a sharp recovery in new export orders since mid-2016. However, Southeast Asia lags the broader region in this regard. Furthermore, gains in export volumes - which reflect actual underlying demand - have not moved significantly higher across emerging Asia.
To a large degree, the sustainability of export demand for Asia's goods depends on the health of the world’s largest economy, the US. Thanks to the prospect of tax cuts and higher infrastructure spending, HSBC expects the US economy to grow 2.3% this year, and a faster 2.8% in 2018 as tax legislation gets implemented.
“There are some hopes that when such a large economy speeds up, there will be spill-over effects on Asia,” said Ms. Lim. The reality, she said, is not so straightforward. Historically, the country in Asia that has tended to benefit the most from a pick-up in US growth is China. In contrast, Southeast Asian economies have tended to capitalize much less on a US recovery, instead benefiting more from a pick-up in Chinese activity.
“China depends significantly on the US. And in turn, Southeast Asia depends on China. It is not a direct link,” said Ms. Lim.
Another issue that further complicates the outlook for international trade is the potential for trade protectionism under the Trump administration. The US economy may be growing at a faster rate, but the Trump administration has said it wants the expansion to be less reliant on imports from the rest of the world, and in particular, China.
HSBC's China economists believe that a full-blown trade war between the US and China is highly unlikely. Nevertheless any decline in Chinese exports due to greater US protectionism would adversely impact China's GDP growth, and in turn, ASEAN growth.
The impact of China's growth on the Southeast Asian economies cannot be overemphasized. For example, Malaysia's exports could decline by 0.5 percentage points and GDP fall by over 0.4 percentage points for every three percentage points of slowdown in Chinese investment.
On a brighter note, despite the US having abandoned the Trans-Pacific Partnership (TPP), China has stepped up efforts to drive the Regional Comprehensive Economic Partnership (RCEP). Though narrower in scope, the RCEP should still help to boost intra-Asia trade, and could be concluded by the end of this year, said Ms. Lim.
Moving on to Southeast Asia’s domestic dynamics, Ms. Lim said the high levels of household debt in some ASEAN countries remained a source of concern. In Malaysia, household debt stands at nearly 90% of GDP, and at around 80% for Singapore and Thailand.
The risk here, said Ms. Lim, is that highly indebted households that have borrowed money to buy cars and houses could find it increasingly difficult to service their loans amid weakening wage and employment conditions. Under such a scenario, the incidents of defaults could rise, and households could also reduce their consumption levels. Further making goods less affordable is that fact that inflation is also moving higher.
Despite the slow growth environment, regional central banks are somewhat limited in their policy options, said Ms. Lim. Rising inflation for example, makes it hard for them to cut interest rates to support the economy. It is also likely that the US Federal Reserve will continue to lift its policy rate in 2017 and 2018. Alternatively, governments could stimulate growth through tax cuts and infrastructure spending, but these depend on the country’s overall fiscal health.
There is no uniform approach across the region. In Malaysia, generous government spending is not an option as fiscal consolidation remains the top priority, said Ms. Lim. The government has targeted a narrower budget deficit of 3% of GDP for this year, after failing to meet this goal in 2016. The Philippines, by contrast, wants to increase government spending to make up for under-investment in infrastructure in the past.
To conclude, Ms. Lim said that 2017 looked set to be a challenging year for Southeast Asia. The year will hinge on how successful governments are in their attempts at stimulating domestic economic growth, while on the external front, a meaningful pick-up in export demand will be essential for a broad recovery in the region.